Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.

Question

Quizplus · Accepted Answer

To find the marginal tax rate where after-tax cash flows are equal, set the after-tax cash flow of Transaction 1 equal to the cash flow of Transaction 2: $160,000 * (1 - tax rate) = $120,000. Solving for the tax rate gives a rate of 25%.

Unlow Inc Must Choose Between Two Alternate Transactions